Hi, dear traders! On the 1-hour chart, GBP/USD rebounded from 1.2007 on Monday. The price reversed in favor of the British pound and jumped in a few minutes to 1.2112, the 127.2% Fibonacci correction. If the price dropped off 1.2112, it will benefit the US dollar and the instrument will retreat to 1.2007. If the currency pair settles above 1.2112, this will increase the likelihood of further growth towards the next key level of 1.2238. Be aware that the sterling's growth could be short-lived for a few reasons.
Half an hour ago, market participants got to know British PMIs. The manufacturing PMI rose to 49.2, much stronger than expected. The services PMI surged to 53.3 whereas the consensus suggested a climb to 49.3. The third composite PMI also came in better than expected. All in all, the three indices supported the bulls which accounts for a jump in GBPUSD in the first half of the day. I cannot say that the upbeat PMIs will reverse the trend upward. Apparently, the sterling will lose ground later today, unless US PMIs fall short of expectations. I used to tell you that business activity indices are not the metrics of crucial importance to influence further monetary policy, interest rates of central banks, GDP, and inflation. On the contrary, expansion in business activity is negative for the pound sterling because it sets the stage for inflation acceleration.
The essence of the crusade against inflation through monetary tightening is to cool down economic growth. If the economy clicks into gear, inflation is unable to decline or decline at a desirable pace. Another hurdle to bringing down inflation in the UK is strong wage growth which also propels inflation. In the end, inflation has been dipping marginally for the recent three months. This factor could support the sterling if it meant that the Bank of England would raise interest rates indefinitely. In practice, the cycle of rate hikes has its deadline.
On the 4-hour chart, GBP/USD reversed in favor of the pound sterling after the MACD formed bullish divergence. The currency pair also settled above 1.2008 which allows us to predict some growth. As I said earlier, the price may resume its fall at anytime. Today the pound sterling is accompanied by good luck. Tomorrow it might have bad luck. None of the indicators signals divergence in progress.
Commitments of Traders report (COT):
The sentiment of Non-commercial category of traders got less bearish last week than a week ago. The number of long contracts held by speculators decreased by 6,713, while the number of short contracts - by 7,476. The overall sentiment of large players remains the same - "bearish", and the number of short contracts still exceeds the number of long contracts. Over the past few months, the situation has changed about the British pound, but now the difference between the number of long and short positions held by speculators is again almost twofold. Thus, the pound's outlook has worsened again, but the sterling itself is in no hurry to fall, focusing on the euro. On the 4-hour chart, there was an exit beyond the three-month ascending corridor, and this factor may prevent the pound from further growth.
Economic calendar for US and UK
UK: services PMI on tap at 09-30 UTC
UK: manufacturing PMI on tap at 09-30 UTC
US: services PMI available at 14-45 UTC
US: manufacturing PMI available at 14-45 UTC
The economic calendar on Tuesday doesn't contain significant macroeconomic data. Nevertheless, strong UK figures have already driven a notable increase in the pound sterling. The information environment will hardly make a serious impact on market sentiment in the second half of the day. Still, American reports might spring surprises.
Outlook for GBP/USD and trading tips
It makes sense to open new sell positions on GBP/USD after the price drops from 1.2112 on the 1-hour chart with the downward targets at 1.2007 and 1.1883. The buy scenario will come into play if the instrument closes above 1.2112 with the upward target at 1.2238.